MTS Advances After Deutsche Bank to UralSib Raise to Buy

OAO Mobile TeleSystems, the Russian wireless carrier that lost two-thirds of its value last year, posted the steepest weekly gain since 2009 in New York as analysts from Deutsche Bank AG to UralSib Capital said the selloff is a buying opportunity.

American depositary receipts of MTS, as the company is known, advanced 19 percent to $9.39 last week, extending to 52 percent their jump since a December low. Deutsche Bank and UralSib raised their recommendations to buy from hold on Jan. 29, while Gazprombank reiterated a bullish rating last week. The Bloomberg index of the most-traded Russian companies in New York rose the most in more than two years as oil prices rebounded.

MTS, which trades at a price-to-earnings multiple that’s about half the average of its global peers, has a “compelling relative valuation,” Deutsche Bank analyst Igor Semenov wrote in a note Jan. 29 that praised the company’s strong operating execution. MTS’s projected dividend yield of 7.6 percent, highest among Russia’s four major phone carriers, “should be safe” despite a shrinking economy, UralSib’s Konstantin Chernyshev said in his report.

“For many investors MTS is now a buy call, as it was unjustifiably oversold in 2014,” Sergey Vasin, an analyst at OAO Gazprombank in Moscow, said by phone on Feb. 6. “Even though the coming year will be challenging as the ruble’s fluctuations and the Ukraine uncertainty are still present, we expect investors to see that, for the price they pay, they get a solid company with strong operating performance and good dividends.”

Owner’s Arrest

The company raised its 2014 sales and earnings forecasts in November after third-quarter profit beat analysts’ estimates. Revenue for the full year will grow more than 2 percent, MTS said, amid rising demand for e-mailing and Web-surfing on mobile devices.

Shares fell by almost a half last year during MTS billionaire owner Vladimir Evtushenkov’s three-month house arrest on charges of money laundering, amid investor concern that Evtushenkov’s companies would meet the same fate as Yukos Oil Co. owner Mikhail Khodorkovsky’s more than a decade ago. Evtushenkov was released in December and invited to a meeting at the Kremlin in a gesture that was interpreted as a conciliatory move on the part of President Vladimir Putin.

Revenue from Ukraine, which represented 10 percent of total sales in 2013, declined about 25 percent in the third quarter as a separatist conflict in the former Soviet republic led to a collapse of the local currency. The conflict has killed more than 5,350 people since April, the United Nations estimates.

International Sanctions

Russia, the world’s largest energy exporter, faces its first economic contraction in six years as oil prices near 2009 lows and a 50 percent weakening of the ruble since June exacerbate the impact of international penalties over the country’s alleged role in the war in eastern Ukraine.

“We are seeing massive volatility in the ruble, which is impossible to ignore,” Allan Nichols, an analyst at Morningstar Inc., said by phone from Amsterdam on Feb. 6. “My hold projection is purely because of the currency. If you can withstand that volatility, I’d say the stock is long-term undervalued and presents a buy opportunity, but I can’t say it quite yet.”

In an effort to stave off a deeper confrontation, German Chancellor Angela Merkel and French President Francois Hollande held talks with Putin, who denies Russia’s involvement in the conflict. A new document on implementing a cease-fire agreement from last September is being prepared, Putin spokesman Dmitry Peskov told reporters in Moscow on Feb. 6.

Oil Rally

MTS, which is down 53 percent from June, trades at 9.6 times 12-month earnings, compared with an average multiple of 19 for 16 global peers, data compiled by Bloomberg show. It is set to gain 36 percent in the next year, the mean of 16 analyst estimates indicates. Its projected dividend yield compares with an estimated ratio of 3.1 percent for VimpelCom Ltd.

The Bloomberg Russia-US Equity Index jumped to an eight-week high of 54.95. The Market Vectors Russia ETF, the biggest U.S. exchange-traded fund that holds Russian shares, jumped 12 percent last week. Futures on the dollar-denominated RTS Index rose 0.2 percent in U.S. hours.

Crude oil capped the biggest two-week rally in 17 years on speculation a falling rig count will curb U.S. production growth. Brent for March settlement surged 9.1 percent last week in London.

“MTS is solid financially, even as the economy slows and the ruble is weaker, which is why investors are optimistic on the stock,” Konstantin Chernyshev, an analyst at UralSib, said by phone from Moscow on Feb. 6. “We see oil going up, pushing Russian markets higher and giving hope that appetite for Russian companies will grow again.”